Margin Squeeze

“Who was the first person to look at a cow and say I think I’ll drink whatever comes out of those things when I squeeze them?”
-Calvin & Hobbes

Legendary American Cartoonist Bill Watterson stopped drawing Calvin & Hobbes back in 1995 “with a short statement to newspaper editors and his readers that he felt he had achieved all he could in the medium.” (Wikipedia) 

If there was a cartoon (our very own Bob Rich will create one!) that made a short statement about Friday’s US Jobs Report, it would be that US Corporate Margins have achieved all they could from a margin perspective. Now they’re going to get squeezed. 

Write it down: Margin Squeeze. That’s what happens when both GDP and revenues are #slowing from their cycle peaks and wages continue to #accelerate pro-cyclically. Unlike interest rates, the almighty Fed can’t cut wages. 

Back to the Global Macro Grind… 

It’s Macro Monday @Hedgeye! Welcome back. For those of you who are new to our data-driven ROC (rate of change) research #process, on the 1^st day of every week we review last week’s macro moves within the context of our @Hedgeye TREND views. 

As usual, let’s start with the Global Currency market: 

1. US Dollar Index was up another +0.9% last week to +1.2% YTD and remains Bullish TREND @Hedgeye
2. EUR/USD was down another -1.1% last week to -2.0% YTD and remains Bearish TREND @Hedgeye
3. Japanese Yen was +0.7% vs. USD to -1.4% YTD and remains Bearish TREND @Hedgeye
4. British Pound was -1.4% vs. USD to +2.0% YTD but remains Bullish TREND @Hedgeye
5. Canadian Dollar was -0.9% vs. USD to +1.7% YTD and is Neutral TREND @Hedgeye
6. Brazilian Real was down -2.4% vs. USD to +0.3% YTD and remains Bearish TREND @Hedgeye
7. Argentine Peso was down another -3.2% vs. USD to -8.6% YTD and remains Bearish TREND @Hedgeye 

Not that US Corporates should be guiding you to where their profit margins will be in US Dollars in real-time or anything (we’ll do that for you), but think about where the US Dollar is on a year-over-year basis: 

A) Year-over-year, the US Dollar Index is +8.0%
B) Year-over-year, the Argentine Peso is -50.6% (that’s not a typo) 

Neither are some of this morning’s Global #GrowthSlowing data points that perpetuate Global Quad 4 and a rising US Dollar: 

1. German Industrial Production DOWN -3.3% year-over-year in JAN
2. Chinese Auto Sales DOWN -13.8% year-over-year in FEB
3. Japanese Machine Tool Orders DOWN -29.3% year-over-year in FEB 

The other big thig that happens during Global Quad 4 is that most Sovereign Bond Yields fall: 

1. UST 10yr Yield was down another -12 basis points last week to 2.63% and remains Bearish TREND @Hedgeye
2. German 10yr Bund Yield was down -11 basis points last week to 0.07% and remains Bearish TREND @Hedgeye
3. Swiss 10yr Yield was down another -12 basis points last week to -0.38% and remains Bearish TREND @Hedgeye 

While we have a lot of subscribers who get paid to try to get every move in the stock market right, many of our subscribers have found it a lot easier to get their largest asset allocations (US Dollars and Treasuries) right for the last 6 months. 

Even if you’re looking at stocks within the lens of #PeakCycle (SEP 2018), #GrowthSlowing (Quads 3 & 4), and Bond Yields, you’ve still crushed your competition in both the last week and 6 months: 

1. Utilities (XLU) were UP another +0.7% last week taking their 6-month gain to +6.4% and remain Bullish TREND @Hedgeye
2. REITS (VNQ) were UP another +0.2% last week taking their 6-month gain to +1.2% and remain Bullish TREND @Hedgeye
3. Financials (XLF) were DOWN -2.7% last week taking their 6-month LOSS to -8.3% and remain Bearish TREND @Hedgeye 

Why does the last 6 months matter more to me than the last 6 weeks? Well, that’s simple. I look at this selfishly (my p.a.)! 

Six month ago I shifted all my personal accounts and asset allocations to Quad 4 in the USA (I’d already made that move in China, EM, and Europe 9 months prior). So I’m not wearing the baggage of the Russell 2000 being down -12.2% in the last 6 months. 

What else diverged again both last week and in the last 6 months?

A) Gold was +0.1% last week and is +7.2% in the last 6 months and remains Bullish TREND @Hedgeye
B) High Yield Spreads widened +28 basis points last week and are +68 basis points wider in the last 6 months 

Another thing that did well last week was the VIX. With the SP500 down for the 8^th day in the last 9, front-month VIX was +18%. Other things that didn’t do so well last week in Global Equity terms were: 

1. Japanese Stocks (Nikkei 225) were down -2.7% last week to +5.1% YTD and remain Bearish TREND @Hedgeye
2. Mexican Stocks were down another -2.4% last week to -0.1% YTD and remain Bearish TREND @Hedgeye
3. Greek Stocks were down -2.3% last week to +13.6% YTD and remain Bearish TREND @Hedgeye 

Greek stocks are a great example of something you could be up a lot in if you bottom-ticked buying them in December, but you’re still in crash mode (down -22%) in since Global Quad 4 started in January of 2018. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now: 

UST 10yr Yield 2.60-2.70% (bearish)
UST 2yr Yield 2.43-2.52% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
Utilities (XLU) 56.12-57.86 (bullish)
REITS (VNQ) 83.24-84.67 (bullish)
Nikkei 21000-21613 (bearish)
VIX 13.42-18.89 (bullish)
USD 95.75-97.82 (bullish)
EUR/USD 1.11-1.13 (bearish)
USD/YEN 110.88-112.43 (bullish)
GBP/USD 1.29-1.33 (bullish)
Oil (WTI) 55.14-57.63 (bullish)
Gold 1 (bullish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer